Traders on edge as volatility surges in China’s iron ore futures

Surging volatility in China's iron ore futures is sending global prices on a roller-coaster ride, spelling risks for traders and steel mills, some of whom are losing faith in a market swayed by speculative Chinese money.

Workers remove the cloth covering the iron ore from Australia while they prepare for transporting at a port in Tianjin municipality March 29, 2010. (Source: REUTERS/Vincent Du/File Photo)

Surging volatility in China’s iron ore futures is sending global prices on a roller-coaster ride, spelling risks for traders and steel mills, some of whom are losing faith in a market swayed by speculative Chinese money.

Amid wild swings in futures, spot iron ore prices .IO62-CNO=MB surged by a record 23 percent in the second week of November, only to fall nearly 10 percent the following week.

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At the same time, steel producers say a near 80 percent rise in spot iron ore prices this year despite plentiful supplies does not reflect physical demand, raising concerns that buyers could be left with costly iron ore in the event of a sharp pullback. Some are sitting out the volatility and holding back purchases.

“I cannot imagine the price hit $70, it’s crazy. Supply of iron ore is bigger than before,” said an iron ore buyer for a mill in China’s Fujian province.

Unlike oil, gold and copper, whose benchmark pricing is set in London and New York, iron ore is one of the few commodities whose global pricing takes its cue from China. Because of the massive volumes of iron ore futures traded on the Dalian Commodity Exchange, the direction of prices set there virtually dictates the path for the physical market. In March, the futures volume reached a record 7.6 billion tonnes, or more than five times the annual global iron ore trade.

On Wednesday, the most-active iron ore contract on Dalian posted its most volatile trading day since July 2015 when futures prices hit their lowest since the contract began in 2013, based on Thomson Reuters data.

The contract has moved in a 10 percent trading range on some days this month, a huge move in the once-staid iron ore market.

SPECULATIVE CRACKDOWN

Price moves have been partly driven by an attempt by Chinese commodity exchanges to crack down on speculative trading, which led to a steep selloff last week after a series of sharp rallies. Futures surged back this week, pushing prices to near three-year highs, before coming off again. “Prices are changing too fast. It’s difficult to strike a deal,” said an iron ore trader in Shanghai.

A sudden price drop could prompt a buyer who bought a cargo at a higher price to walk away from the deal while a trader would try to renegotiate a cargo he sold at a low price when the market abruptly shoots up, he said. “This kind of market is not good for anybody,” he said.

Iron ore’s surge has surprised many in the market, because unlike supply-deprived coal, there remains plenty of iron ore, with stocks at China’s ports the biggest in more than two years. &lt;SH-TOT-IRONINV&gt; While spot prices have tracked futures higher, traded volume in the physical market is “very low,” said a trader at a global trading firm in Singapore.

“Market participants are losing faith in the market. There’s too much speculative money in China that is affecting physical prices,” he said. With the seasonally weak winter period approaching, some Chinese steel producers are holding back from purchasing iron ore and waiting for prices to stabilise, he added.